Top 5 Pharma Stocks to Invest in

The pharma sector is defensive, in the sense that the demand for pharmaceuticals is not affected by the business cycles in the economy. People who consume drugs continue to consume drugs irrespective of whether there is a boom or recession in the economy. 

The pharma sector in India came into sharp focus after generic drugs manufactured in India started being exported to developed countries like the U.S.A, U.K. and the E.U. This helped curtail the price inflation and increase in health budgets by having relatively cheaper generic substitute drugs. 

The Covid-19 pandemic has brought back pharma companies into sharper focus with the increased demand for essential drugs. There are several pharma companies which have registered strong financial performances, but we confine our discussion to the top five pharma companies. You can opt for any of these pharma companies through your stock trading app.

List of the top pharma companies and their performance 

The list below gives price-earnings ratios, dividend yield, quarterly sales variance, and return on capital employed by the top pharmaceutical companies. You can buy any of these five stocks through your stock trading app.

  • Dr. Reddys’ Laboratories: One of India’s top generic drugs players, Dr. Reddy’s Lab supplies to important markets including Russia and China. Dr. Reddy’s is expected to increase its launches in the U.S.A and emerging markets. The increase in the number of launches of new products is expected to propel revenue growth, which, combined with controlled costs, is expected to boost margins. Its diversification into other global markets also reduces its historic dependence on the U.S.A. Dr. Reddy’s Labs is one of the market leaders with sales growing at a compound annual growth rate (CAGR) of 10% and profits growing at 30% CAGR. It has registered a return on equity of 12% p.a approximately and trades at a Price/Earnings ratio of 32.4 times approximately. It also enjoys a low debt/equity ratio.
  • Sun Pharmaceuticals started as a company manufacturing psychiatry drugs and has grown into a large specialty generic drug manufacturing company. It is the fifth largest pharma company in this segment. Sun Pharma’s main market is the U.S.A. and its bestselling product segment is dermatological drugs. Though it doesn’t have a strong track record of performance due to some setbacks in recent years, Sun Pharma share price is poised to make a comeback. It trades at a Price/Earnings ratio of 30 times approximately and a 5-year ROE (Return on Equity) of 10.41% p.a.
  • Divi’s Labs: It is India’s largest contract research and manufacturing company. It is the authorised Active Pharmaceutical Ingredient manufacturer of Molnupiravir, a key drug in treating Covid-19. The company has undertaken backward integration and expansion. It is an export-driven company with exports accounting for 85% of its revenue. Any rupee depreciation enables the company to benefit from currency tailwinds. The company has a high absolute value per share and also has a high Price/Earnings ratio of almost 44.5 times.
  • Alkem Laboratories: It is one of the largest generic and specialty pharma companies operating in India. It is a U.S.-based multinational company with extensive operations in India. It has a rich product portfolio composed of well-known brands, especially in the anti-infectives segment. The company enjoys an ROE growth of 24.23% and a Price/Earnings ratio of 25.3 times.
  • Abbott Laboratories has a diversified product portfolio, including nutritional products, branded pharmaceuticals and diabetic and vascular devices. The company enjoys an attractive 5-year Return on Equity of 25.5% but a high absolute value per share and a high Price/Earnings ratio of 57.31 times. 
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Key Takeaways

 To have a well-diversified portfolio, you must not only accumulate cyclical stocks but also have some defensive stocks belonging to the pharma and FMCG sectors to ensure portfolio diversification and risk minimisation. You can follow this strategy by investing judiciously through your stock trading app.